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Friday, May 15, 2009

The Business Still Has SOME Value

LCA Vision (LCAV) is a provider of laser vision corrective surgeries. Demand for these non-essential, expensive surgeries is strongly correlated to levels of consumer confidence. As one can imagine, this correlation has resulted in the number of surgeries performed this year to be slashed in half as compared to last year. Combined with the fact that the company's cost structure is fairly rigid (medical/laser equipment, service locations and staff still have to be present even if not used to capacity!), and the prospects for this company look grim.

This business model would make most investors head for the exits at economic times like these. For investors who look to buy businesses rather than stocks, however, this company still has some value. And it is precisely because most investors headed for the exits that value investors were able to buy into this company for far less than it is worth.

When we last looked at LCAV, it traded with a market cap of $64 million, despite the fact that it had $56 million in cash alone! When looked at from the point of view of a buyer of an entire business (as value investors like to do), one was essentially paying $8 million to purchase a business that had earned an average of $15 million in net income the last four years. Yes, it had lost $7 million in the last quarter, but management was closing unprofitable locations, reducing capital expenditures, and is believed to have cut expenses such that the company's cash flow would break even in 2009.

Since the stock's low just two months ago, the stock is up some 200%! Investors who avoided the herd mentality, and instead focused on buying businesses selling for below their worth, were handsomely rewarded.